Entries in HSBC
(3)

A federal judge refused to approve a proposed settlement between HSBC Holdings and Thema, an Irish fund that acted as a 'feeder fund' in funneling money to Bernard Madoff's Ponzi scheme. HSBC acted in a custodial role for Thema International Fund, whose investors lost their entire investment valued at over $300 million to Madoff's scheme. The two parties had announced in June that they had reached a settlement in which HSBC, while admitting no wrongdoing, would pay $62.5 million, or roughly 20% of Thema investor losses. The balance in the fund at the time of Madoff's arrest was over $1 billion, but most of those profits were fictitious.

United States District Judge Richard Berman, while noting that he generally favored the settlement of suits - especially class actions - noted several "obvious deficiencies" in refusing to accept the proposed settlement, including the setting aside of a $10 million reserve for attorney's fees to pursue claims against non-settling defendants also named in the suit. Judge Berman also took issue with what he perceived as the inadequate disclosure of legal costs. Reflecting on the settlement, Judge Berman noted that while he would consider a revised accord, the current settlement was "not fair, reasonable or adequate -- even at this preliminary stage."

Proposed settlements, while subject to a judicial stamp of approval, are routinely approved and viewed as essential to trimming judicial dockets of cases that should not be tried. The rejection is notable in that HSBC had recently won the dismissal of common law claims filed by Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's failed brokerage. There, United States District Judge Jed S. Rakoff had ruled that Picard lacked standing to bring those claims against HSBC, and that the proper party to bring those claims were the wronged investors. Picard has appealed that decision to the Second Circuit Court of Appeals.

"Without arguing the Trustee’s appeal in this case, the Trustee respectfully submits that the HSBC decision is unsound in multiple respects and should not be followed by this Court."

Late this past week, the trustee appointed to recover funds for the benefit of investors defrauded by Bernard Madoff's massive Ponzi scheme filed his response to an effort by JP Morgan ("JPM") to dismiss a suit seeking billions in damages for JPM's alleged role in the scheme. In the amended complaint filed in June, Irving Picard tripled the amount sought from JP Morgan from $5.4 billion to nearly $20 billion based on JPM's willingness

to assist in the daily operation of a Ponzi scheme on an unprecedented scale: to routinely enable billions of dollars to bounce back and forth between BLMIS and its customers with an evident lack of legitimate business purpose, to overlook the lack of securities trading, to decline to inquire into or report fictitious account activity, and to cloak the whole enterprise in the respectability of a renowned financial institution.

In his 168-page opposition to JPM's Motion to Dismiss, Picard makes several arguments in response to JPM's claims, including (1) that Picard has standing under SIPA and the Bankruptcy Code to bring a contribution claim, (2) that Picard has standing to stand in the shoes of a judgment creditor and assert common law claims, (3) that Picard has sufficient standing as bailee and subrogee to bring common law claims, (4) that Wagoner and the doctrine of in Pari Delicto are inapplicable to his claims, (5) that Picard's claims are not barred by the Securities Litigation Uniform Standards Act, (6) that Picard has sufficiently pled each cause of action under which he is proceeding against JPM, and (7) the specific transfers sought to be avoided are in fact avoidable. Many of the issues are hardly new to Picard, who has faced steady opposition in his quest to recover damages outside the "comfort zone" of bankruptcy clawback suits and settlements with various feeder funds. Both UBS and HSBC, among other banking institutions facing similar suits from Picard, have asserted some form of these arguments in their efforts to win dismissal.

But it is not Picard's latest legal wrangling with these issues that stands out in this filing. Instead, perhaps most notable is the fact that it is one of the first substantive filings since Judge Rakoff's ruling that Picard lacked standing to assert the same common law claims against HSBC - potentially erasing $9 billion in prospective damages for Madoff's victims. And while Picard appealed that ruling to the Second Circuit Court of Appeals several days ago, he lays out his discontent with Judge Rakoff's ruling in this filing.

The focal point of Picard's discontent lies in the differing interpretations of the standing conferred on a trustee proceeding under the authority of the Securities Investor Protection Act ("SIPA") or the Bankruptcy Code. The term "standing" refers to the ability of a party to show a sufficient connection to and harm from the matters at issue to justify that party's involvement in the case. Such an issue has been hotly contested in the forum of court-appointed receivership and bankruptcy proceedings, where often the most common claims pursued by the receiver or trustee are on behalf of the class of defrauded victims.

Perhaps luckily for Picard, Judge Rakoff is not overseeing the suit against JP Morgan. Instead, the suit is before United States District Court Judge Colleen McMahon. In accordance with the Federal Rules of Civil procedure, JP Morgan will now have an opportunity to file a Reply to Picard's Response.

When Judge Jed S. Rakoff recently granted the dismissal of Irving Picard's common-law claims against HSBC, included in the order was an innocuous footnote at the bottom of page 25 stating that "Although it seems clear that these claims would also have to be dismissed against any other defendants who appeared and so moved, no other such defendant has so moved." In the ensuing days, several of the other banking institutions sued by Picard obliged, including JP Morgan and Unicredit Bank Austria.

In an order signed Saturday, August 6, and filed on the Court docket the following Monday, Judge Rakoff granted the dismissal of common-law claims asserted by Picard against Unicredit Bank Austria. As requested by Bank Austria, the previous order dismissing common-law claims against HSBC was ordered amended to include a dismissal of the common-law claims consisting of counts twenty through twenty-four asserted against Bank Austria in Picard's amended complaint.

With this dismissal, the total amount sought by Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's massive Ponzi scheme, continues to decrease. The amount is set to further decrease should the Court follow its rationale in ruling on JP Morgan's still-pending motion to dismiss similar common-law claims, including treble-damages claims based on the Racketeer Influenced and Corrupt Organizations Act.